How To Achieve Financial Independence – Part 1: Savings Rate

At last count, this author figures there are 1,302,482 early retirement blogs out there. You’d think, in all those blogs, there’d be a detailed account of how to get to the position the author is in. If there is, I’ll be damned if I can find it. Most early retirement blogs focus too much on why it’ll be awesome to retire early, and not enough on the heavy lifting required to get there. This series will help.

So, you’ve decided you want to join the ranks of financially independent? Congratulations. Now be prepared to work your ass off.

Today’s post is going to focus on the savings rate you’ll need to retire early. Alas, you’re not going to be sipping tea and playing shuffleboard as a 40 year old unless you work really hard at it. In fact, most people severely underestimate the steps they’ll need to get there.

Let’s assume you want to accumulate a million dollar portfolio in 20 years. You’re 22, you’ve been working all of 6 weeks, and you’ve decided this work stuff is for chumps and/or chumpettes. Assuming you start funneling all your cash into something that’ll return 8%, here’s what you’re looking at.

10 years – $64,000/yr

15 years – $34,150/yr

20 years – $20,400/yr

25 years – $12,800/yr

Wow. To recap, if you start at 22, you’ll have to save $12,800 per year to reach a million bucks by 47. To make things a little more realistic, let’s look at how much you’ll need to save every month to get to that allusive $1M mark and financial independence.

10 years – $5333/month

15 years – $2845/month

20 years – $1700/month

25 years – $1066/month

That puts things into perspective a little more, doesn’t it? You’ll have to save more than the average family makes in a month in order to get to a our million dollar goal in 10 years.

But wait a minute. If you want to retire early, you’ll need to be investing in stuff outside of your RRSP and TFSA. You don’t have unlimited contribution room, and you’ll be needing to pay taxes on your gains outside of your tax deferred retirement accounts. Let’s assume you pay taxes of 10% on your earnings each year. How much more will you have to save to get to early retirement?

Years

Orginal Amt.

New Amt.

10

$64,000

$67,000

15

$34,150

$36,900

20

$20,400

$22,500

25

$12,800

$14,400

Is this a good time to point out that all the numbers above are just approximate? As in, the actual annual amounts needed might vary by a couple hundred bucks because of rounding? Feel free to give me flack for that in the comments.

This post is turning out to be pretty number-y. How about a fun picture to break up the monotony?

OH. MY. GOODNESS. SOMEBODY COVER THE EYES OF THE CHILDREN.

Where were we? Right, savings rates.

Okay, now that we’ve demonstrated how difficult it is to retire early on investing at an 8% return, let’s build a table that looks at 3 different scenarios: 9%, 10.8%, 12.6%. (That’s returns of 10%, 12%, and 14%, respectfully, after our imaginary 10% taxes.)

Years

9.0%

10.8%

12.6%

10

$60,800

$54,800

$49,200

15

$31,400

$26,700

$22,700

20

$18,000

$14,400

$11,500

25

$10,900

$8,200

$6,100

A couple of observations:

1. My God, I make sexy tables. I’m a little aroused right now.

2. This whole financial independence thing becomes a lot easier when your return on investment increases. How do you accomplish that? That’s next week’s topic, you impatient bastard. Increasing your gross return from 8% to 14% means you can reach your $1M net worth goal by saving $18,000 per year less.

When you’re looking to retire early, every dollar counts. We just spent the first half of this post going over savings rates you’ll need to get to a $1M net worth, a number that many people don’t even think is enough for someone to live on for the rest of their lives. But screw it, let’s go with that number. We gotta pick a number somewhere.

Anyway, how are you going to get to that savings rate? Well, there’s essentially two options – making an assload of money or being so frugal that you make Trent Hamm look like a rapper.

We all know the careers that can make you all sorts of cash. Going to Wall Street is generally a pretty good way to make the big bucks. If you share a 2 bedroom apartment with 4 other guys and don’t spend all your money impressing chicks who like wall street guys, you just might be able to get to our $1M target in 10 years.

Most of us though, we’re mere mortals. We have average jobs, maybe we realistically max out at six figures, but only after years of sticking around in the same industry. If you’re looking to shun the working life early though, you’re probably not going to get the opportunity to max out your salary. That means you get to push the limits of frugality. Sounds like fun!

We all know what you need to do. You need to minimize your housing costs to nothing. I’d recommend staying in your parents’ basement, but maybe you can find a generous friend/sugar daddy. You’re going to want to eat a lot of cheap, cheap pasta. A car? Well sure, assuming it doesn’t cost more than $500. I’d also recommend getting used to delicious cold water and trying to figure out your neighbor’s internet password. You can read and watch movies – assuming they’re from the library – but don’t even think about having friends or restaurant meals.

I’m just missing one important part when it comes to financial independence – finding a spouse with an income and similar life goals. There’s all sorts of advantages to this, from the obvious efficiencies that come from splitting basic expenses to a virtual doubling of income.

Obviously, finding someone with similar goals won’t be that easy, especially in today’s world of iPhones, alcoholic beverages and easy credit. I’d recommend Craigslist, under something called Intimate Encounters. You’ll have to wade through a crapload of penis pictures, but it’ll all be worth it once you find Ms. Cheap Right.

I’m going for a mix of #1 and #2. I’m not really counting on my investments outperforming the market, I mean I’ll invest with the intention of this happening, but I really don’t count on this in my “plan”. I’m hoping that between the mix of low expenses, and a decent portfolio bringing in good cashflow I’ll be financially independent from my job (to me this means having enough money to quit and not have to work anymore if I want, or FU money).

I would love for my spouse to pick up the slack, but she is not down with that at all. Even though she’s 3 years younger then me, she thinks she gets to retire at the same time I do. Because she is 1) better looking and 2) tolerates me she’ll probably get to do this – which brings me back to #1 and #2 in your list carrying us both through.

My ace in the hole is a pretty good defined benefit pension plan that will kick in at 65 (if I work where I do until I retire). Inflation will eat this up quite a bit, but it is cash coming in.

I keep spending my retirement money on random girls. I don’t think that’s good for my retirement plans. But I don’t care right now. What do you suggest I do?

I had an offer to be a kind of Kato Kaylin for this one girl – stay home be Mr. fixit / Pool boy move to a hot place in the south in her house. Sounded like a sweet deal… Just couldn’t do it though. Too many things to go wrong when you depend on someone else to pay your ride.